The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I have nearly $20k in credit card debt and $10k in debt to a previous commercial landlord of mine. I have come upon roughly $30k for the purpose of settling these debts. What’s the best way to negotiate with the credit card companies and landlord to settle my debts.
Coming up with the means to pay off your debts is not an easy feat. So, I commend you for doing so. There are several strategies to pay off your debts, one of them being debt settlements. Whenever you settle a debt with a lender, you and the lender come to an agreement in which the lender accepts payment toward the debt for less than it’s owed and considers the debt satisfied. You’ll find that many lenders are usually open to negotiations if you approach them in the right way.
Decide if it’s right for you
Negotiating a debt settlement frees you from the unpaid debt, saving you money in accrued interest and fees and avoiding potential legal actions against you. However, on the downside, settling a debt can hurt your credit score and have tax consequences. For example, if your lender forgives any part of your debt greater than $600, you’ll likely have to pay income taxes on that amount. So, talk it over with your accountant and carefully determine if this is the best move for you.
Tips for negotiating your settlement
Once you are ready to negotiate your settlement, review your debts and create a plan tailored to each creditor. It’s essential to approach your negotiations with the right mindset. Remember that the lender’s incentive to accept a settlement is to get some money for a debt that otherwise would not receive payment. With that in mind, you can base your strategy on your previous relationship with the lender, the terms of your original agreement, and the offer you plan to make. You can either offer to pay what you owe in one lump sum or create a payment plan.
Before calling the lender, write some notes about what you’ll say and what you are willing to accept as part of your agreement. For instance, when talking to your credit cards, you can mention how difficult your financial situation has been and how you’ve managed to get some cash to pay some of your debts. You must be honest about your situation without oversharing. Start offering to pay about 30% of your outstanding balance and go up from there. Typically creditors will present a counteroffer and only agree to settle 50-70% of the payment. When dealing with your landlord, make an offer that is more reasonable and that you think may get them to work with you. Once you reach an agreement that you are comfortable with, get it in writing and only make payments when it’s official. Without the proper documentation, your lender may not honor the new agreement and attempt to collect the debt under the original terms.
Overall, whenever you are negotiating your debts, keep the communication friendly and honest. You may be surprised to find that creditors may be willing to work with you. However, if they are not, you may have other alternatives to repay your debts, especially if you have some cash available. If you want to explore other options, you can contact an NFCC certified credit counselor by visiting NFCC.org or calling 800-388-2227. Counselors can review your situation and help you find the best solution to pay off your debts. Good luck!